The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities sector exchange traded fund, is up almost 4% this month, making it one of August’s best-performing sector funds. XLU and some rival utilities ETFs have recently been hitting new highs, but that should not imply the run is over for the often tame utilities sector.
As the Fed continues raising interest rates, the higher rates will make fixed-income instruments more attractive on a relative basis, and bond-like equities, like utilities, less enticing. Consequently, utilities may remain flat or underperform other segments of the equities market once rates start ticking higher.
However, the utilities sector has largely shrugged off two Fed rate hikes this year. XLU is up nearly 13% year-to-date. It, along with the Vanguard Utilities ETF (NYSEARCA: VPU) and the Fidelity MSCI Utilities Index ETF (NYSEARCA: FUTY) were three of the ETFs to hit all-time highs on Tuesday.
“Equities in the utilities space, typically seen as defensive plays and bond proxies given their high yields, have rallied this year for several reasons, but one driver in particular sticks out to Chad Morganlander, portfolio manager at Washington Crossing Advisors,” reports CNBC. “Mergers and acquisitions in the space, as well as deregulation, have propelled the sector (and a popular utilities-tracking exchange-traded fund, the XLU) to new heights this year, Morganlander pointed out.”
Investors should note before departing ETFs like XLU that the utilities sector is historically one of the best-performing groups in the month of September. Year-to-date, utilities are the third-best sector in the S&P 500, trailing only technology and healthcare.